Canadian Institute of Actuaries Seminar for the Appointed Actuary Internal Capital Target (PD-11) by Brigitte Phaneuf Managing Director, OSFI September 24th, 2010 Le Centre Sheraton Hotel, Montréal, Québec
Internal Target Capital Level Agenda Role of Capital in OSFI s Risk Assessment Minimum and Supervisory Capital Targets Capital Management Policy Establishing Internal Capital Targets Corrective Management Actions Q&A 2
Role of Capital in OSFI s Risk Assessment Regulatory capital ratios are not the only factors OSFI considers in its risk assessment Other factors include (but not limited to): Quality, adequacy of, and access to capital Sustainability of earnings Ability to access capital to meet projected needs Oversight Role of senior management and the Board (or Chief Agent) Strength of capital management policy and processes Consideration for risks which may not be fully captured in the regulatory capital tests When is capital adequacy generally considered acceptable by OSFI: Capital is appropriate to an insurer s risk profile, tolerance for risk and operating environment 3
Supervisory Minimum and Capital Level Ratios Supervisory Minimum and Target Capital Ratios (as a percentage of MCT/BAAT) Supervisory Total Minimum 100% Target 150% Not all risks addressed by regulatory capital tests Supervisory intervention if breach of target/minimum ratios 4
Establishing Insurer Specific Internal Capital Target Objectives To provide adequate time for management to resolve financial problems that might arise Minimize the need for OSFI s intervention To provide additional capacity to absorb unexpected losses beyond those covered by the minimum MCT/BAAT and to adress capital need through ongoing market access To ensure capital adequacy under stress scenarios and through entire business cycle 5
Establishing Internal Target Capital Levels Key considerations: Internal target should reflect an insurer s business plan and risk appetite Internal target should take into account the current and forecast business environment Appropriate stress testing (including scenario testing) should be used to determine the level of capital necessary to mitigate material and relevant risks Analysis supporting the setting and maintaining of an internal target should be documented and updated at least annually and should be available for review by OSFI Parental guarantees or injections of capital, where applicable, should not be assumed when setting a internal target 6
Establishing Internal Target Capital Levels (continued) An internal target should be set at a level so that: It exceeds the supervisory target of 150% The impact of a relatively likely scenario(s) is not projected to result in a capital ratio less than 150% over at least a one year time horizon Impact of a higher loss scenario(s) is projected to maintain a capital ratio materially above 0% over at least a one year time horizon 7
Capital Ratios in Perspective Reflects insurer s risk exposures and possible impacts to capital position from residual risks Supervisory target above supervisory minimum to allow for corrective action before capital falls below supervisory minimum Internal Target Supervisory Target Cushion above supervisory target to allow time for corrective action before capital falls below supervisory target. Reflects risks captured in OSFI's Industry Wide Capital Test Supervisory Minimum 8
Capital Management Policy What does OSFI expect of an insurer s Capital Management Policy? Capital Management Policy should include: An internal capital target Documented policies and procedures Defined roles and responsibilities A process that relates capital to current and anticipated future levels of risk Capital adequacy goals with respect to risk Internal controls, review and audit processes be updated at least annually (or more frequently if conditions warrant) be reviewed and approved by the Board (or Chief Agent and oversight committee of Head Office) Timely corrective management actions if capital falls (or is anticipated to fall) below the internal capital target 9
Corrective Management Actions Possible corrective actions addressed in Capital Management Policy should include (but not limited to): Description of plan to increase capital level to at least the internal target in a reasonable but short timeframe Suspension of dividend payments and transfers to parent or home office, where applicable Consideration should be given to the effectiveness of planned management actions in a stressed and/or volatile environment OSFI expects an insurer to contact us if its capital level has fallen, or is anticipated to fall, below its internal target OSFI will review an insurer s plans to return capital to at least the internal target 10
OSFI s Expectations Summary Robust capital management & processes Ability to withstand adverse events Use of appropriate stress testing in setting of its internal capital target Reflect risk appetite and business environment Policy and processes belong to the insurer; OSFI expects formality and transparency Oversight Appropriate monitoring and reporting Timely corrective management actions Inform OSFI if an insurer anticipates falling below its internal target including corrective actions being planned. 11
Questions and Answers????? 12